The Loser’s Curse

Richard Thaler has an article in today's New York Times on mispricing of NFL talent. In the NFL draft, losing teams trade away too much for "first pick" players, Thaler and Cade Massey argue in a recently updated paper.

"We found that the teams choosing early in the draft generally don’t, in fact, get the players that provide the most value per dollar. Our paper is titled “The Loser’s Curse” because we discovered that the first pick in the draft is, on average, the least valuable in the entire first round."
That surprising result has implications not only for football, but also for any domain where organizations try to select talent, whether C.E.O.’s or their own “rookies” — newly minted graduates."

In related news, the Times has an amusing graphic comparing some star CEOs' compensation to their companies' performance.

“Priceless” Now on Kindle

In response to many e-mails: Priceless is now available in a Kindle edition. (The backstory on that here and here.)
Amazon's Kindle edition page uses a number of pricing strategems. They include—
• Charm prices. These are prices ending in 9, which often have an uncanny motivating effect on consumers debating whether to buy. Amazon's eBook price is a super-charming $9.99.
• Advertised reference prices. Amazon quotes a "digital list price" of $12.99. The "What's this?" button informs the curious shopper that "Digital List Price is the suggested retail price set by the publisher." But you don't pay that; instead, the "digital list price" presents an appealing contrast to Amazon's lower price. Lest anyone miss the point, Amazon crosses out the digital list price and gives the discount in dollars and in percent (computed from the not-so-comparable list price of the hardcover book, $26.99).
• "Free." You're just a mouse click away from sampling the book for free.
• "Don't wrap all the Christmas presents in one box." Coined by economist Richard Thaler, this dictum holds that a product's benefits should be enumerated rather than lumped together. Consumers are more likely to buy a Swiss Army knife than a penknife, all things being equal. Thaler's rule is practically the gospel of infomericals. So, if you buy Priceless now, we'll not only send you a fantastic book… we'll throw in "wireless delivery via Amazon Whispernet"… plus, it's "text to speech enabled"!

Pricing the Snuggie

The Snuggie, the "blanket with sleeves," may be an Irony Belt punchline, but somewhere, in a less jaded America, 20 million have bought it. Like other infomercials, the Snuggie pitch uses some powerful tricks of psychological marketing. Next to that, logic — and fashion sense — don't count for much.

• The Snuggie is not quite like anything the viewer has seen before. Is it a blanket? Is it a shirt? Is it a centaur-like hybrid? The potential buyer does not know how to categorize it and can't compare its price to those of familiar products. This leaves the buyer open to suggestion about what a fair price might be.

• The buyer of a novelty product also doesn't know what quality to expect, and this too leaves him open to suggestion about value. "When washed, it sheds," writes this month's Consumer Reports. "Each time we laundered two Snuggies, we removed a sandwich bag's worth of lint from the dryer screen." This provoked a rebuttal by the Snuggie people in The New York Times: "Because the Snuggie is designed to be used like a blanket, you typically don’t have to wash it as often as you would clothing." (Hmmm. The website says that Snuggies are perfect for "Night Time Pub Crawls." My guess is, you'll want to wash it once per pub crawl.)

• How much does a Snuggie cost? Glancing at the website, you might think $19.95. That's the most popular price for infomercial products — a "charm" price that seems so much less than $20. But as Consumer Reports notes, a $19.95 item usually costs $5 or $6 wholesale.

• Postage and handling run $7.95. Yes, you heard me right. The shipping charges are more than the probable wholesale cost of the Snuggie itself. When making a decision to buy, consumers focus on the product price, ignoring the extras. Marketers therefore shift the cost from the "price" to the "P&H."

• California and New York residents must pay sales tax on top of that, nearly $2. In the history of the world, has anyone ever factored that into their decision to buy?

• They throw in a "free" book light. It's mentioned like it's a fascinating product in its own right, but they don't waste much precious airtime on it. Suffice it to say it's small — think "prize in a cereal box."

• The book light is a freebie, the backbone of all infomercial pitches. Instead of selling just one product, they throw in something else for free, sometimes a whole cornucopia of freebies. Economist Richard Thaler calls this principle "Don't wrap all the Christmas presents in one box." Marketers use this formula because it means more sales at higher prices.

• Now wait a minute, I hear the skeptics saying. I wouldn't be caught dead in one of those things — not if THEY PAID ME! These marketing tricks won't work on someone dead set against buying a Snuggie. They work on the persuadable, those sitting on the fence between buying and not buying. Even if you're not a Snuggie persuadable, you are for something else. We all make decisions, and the underlying psychology is much the same.

• Every slasher movie ends with the "slain" villain springing back to life. And every infomercial ends on this "surprise" twist: Buy now, and they'll double your order for free! You get two Snuggies, and two book lights, for just $19.95 with an asterisk. It's the asterisk that just got more expensive. You have to pay another $7.95 for shipping the "free" Snuggie (which probably isn't worth $7.95 wholesale). Grand total: $35.85 (plus any tax).

• What if you want to buy one Snuggie? Sorry, it doesn't work that way. One Snuggie is like the sound of one hand clapping (in a cheap fleece sleeve.)

SEE ALSO
Consumer Reports editors (2010). "Should you 'BUY THIS NOW!'?" Consumer Reports, Feb. 2010, 16-20.
Newman, Andrew Adam (2010). "Infomercial Products Take One on the Chin." The New York Times, Jan. 7, 2010.
Thaler, Richard (1985). “Mental Accounting and Consumer Choice.” Marketing Science 4, 199-214.

Mr. Whipple Was Wrong

The worst marketing pitch of all time? It might be "Please don't squeeze the Charmin!" suggests Time magazine's Sean Gregory. He's writing about an upcoming study of the instant endowment effect, to be published in the Journal of Consumer Research. In the endowment effect (a term coined by Richard Thaler in the 1980s), people place a higher value on things they own than on things they don't own. A familiar example is the elderly couple selling the family home, "full of memories." They place an unrealistically high price on it and can't understand why no buyer is interested. There is at least an emotional logic to that. Much stranger is the "instant endowment effect" in which merely touching something raises people's stated prices. Most economics students experience the classroom demonstration of this effect: Coffee mugs from the campus store are distributed randomly to half the students. The people with mugs are encouraged to bargain with the have-nots and sell their mug at a mutually agreeable price. You might expect (and economic theory predicts) that half the mugs would be sold. That is, half the owners would find a buyer who happened to value the mug more than they did. After all, the mugs were passed out randomly, without any regard to who actually wanted a mug and who could have used some easy cash. But the experiment's usual result is that few mugs sell. The people who have the mugs find that no buyer is willing to pay what they think they're worth.
The instant endowment effect has always had an air of mystery. Day after day, a bag of beef jerky sits at the elbow of the guy at the 7-11. He’s spent more time in proximity to that dried meat snack than he has with his latest girlfriend. Does the instant endowment effect cast its spell on that checker, causing him to demand an inflated price to part with a humble sodium-laden treat? Surely not. Daniel Kahneman proposed that, when you're in the business of selling something, you become immune to endowment effects. Beef jerky does not register as "mine" when it's part of a stock in trade. This plausible hypothesis raises as many questions as it answers. There has been much debate over how, and whether, instant endowment effects apply in marketing.
In the new study, by the University of Wisconsin's Joann Peck and UCLA's Suzanne Shu, coffee mugs and Slinkys were set in front of 241 Wisconsin undergraduates. Half the students were allowed to touch the items; the other half could only look at them (as window shoppers, more or less). The students who touched the products were willing to pay more for them than the window-shoppers. This augments the growing case that instant endowment effects are robust and would apply in the real world. Indeed, Peck and Shu cite the Apple Store as a good application. For fanboy looky-loos, touching is buying.
(Time's Sean Gregory may be a little hard on Mr. Whipple. I imagine Procter & Gamble was counting on reverse psychology. Telling shoppers not to fondle the toilet paper made them do so — in the commercials, and probably in real life).

Bonus Rage

The New York Times' Charles M. Blow has an amusingly minimal graphic, comparing the size of the A.I.G. bailout to the that of the bonuses driving everyone nuts. If the A.I.G. bailout is the sun, the bonuses are Jupiter, or something like that. The question is, why are we more worked up about the bonus millions than the bailout billions? A recent Gallup poll said 59 percent of Americans were outraged over the bonuses. A.I.G. execs have hired security, apparently with reason. ("All the executives and their families should be executed with piano wire — my greatest hope" ran one e-mail note to A.I.G.)
There is something about that word "bonus." A.I.G. execs are, to be sure, drawing large salaries, and large salaries are also supposed to be a reward for the kind of superior performance that generally makes it unnecessary for the government to bail out a company. But big salaries haven't inspired the same level of emotion.
Consider a telephone survey conduced by Daniel Kahneman, Jack Knetsch, and Richard Thaler in the mid 1980s. They asked a nationwide sample of Canadians to rate the fairness of this scenario:

A small company employs several people. The workers have been receiving a 10 percent annual bonus each year and their total incomes have been about average for the community. In recent months, business for the company has not increased as it had before. The owners eliminate the workers' bonus for the year.

An overwhelming majority (80 percent) found this an acceptable business practice. Only 20 percent thought it "unfair." The researchers also tested this alternate scenario on a different random group:

A small company employs several people. The workers' incomes have been about average for the community. In recent months, business for the company has not increased as it had before. The owners reduce the workers' wages by 10 percent for the next year.

This time, most people (61 percent) judged this unfair. But of course all that's really changed is words. In both scenarios, the workers are essentially getting a ten percent pay cut. Those surveyed thought that was acceptable if and only if the foregone pay was labelled a "bonus."
The financial services industry had long used this trick. Profits are volatile. Rather than cut "salaries" in bad years, they cut "bonuses" (which account for much or most of the compensation overall). This makes pay cuts easier to swallow. The verbal legerdemain has now come back to haunt A.I.G. They are finding that the public is far more upset at a multi-million-dollar "bonus" than a multi-million-dollar "salary." Words matter, even for people who ought to know better.